HONG KONG — Local garment factories are getting a new lease on life, thanks to ongoing trade issues that give the “Made in Hong Kong” label a great advantage because it isn’t restricted.

While China has repeatedly been slapped with textile quotas and safeguard measures, Hong Kong has enjoyed relative freedom.

Hong Kong companies are used to doing business with no restrictions, but always working with protectionists, said Andrew Leung, chairman of Sun Hing Knitting Factory and honorary chairman of the Textile Council of Hong Kong. To that end, the territory is a master at redefining itself and remaining competitive with the advantages it has to offer.

These thoughts were outlined in Financial Secretary Henry Tang’s budget speech in February.

“Opportunities also bring challenges. We should therefore continue to promote our economic restructuring, move up the value chain and exercise creativity,” he said. “The mainland [China] itself is growing at a fast pace and will have different policy priorities for the various stages of its development….We should identify those of our own strengths which can complement our motherland’s development.”

Tang also emphasized the importance of continuing to develop high value-added services.

“We cannot, however, afford to be complacent over our achievements,” he said. “To progress further, we must continue to enhance our competitive advantages.”

The territory has long been involved in manufacturing, but as neighboring China opened up with its armies of cheap labor, it became increasingly difficult to compete with the much lower manufacturing costs. While a lot of factories and production moved across the border to take advantage of the lower costs in China, companies have since been coming back to Hong Kong to avoid quota issues, even if it is more expensive.

When World Trade Organization countries dropped import quotas on Jan. 1, 2005, Chinese exports flooded many markets, including the U.S. and the European Union nations. This resulted in the imposition of safeguard quotas, allowed through 2008 by China’s entry agreement into the WTO. Eventually, the U.S. and the EU reached separate accords with China, putting restrictions on a wide range of goods, higher than allowed by safeguards. The EU deal runs through 2007, while the U.S.’s is through 2008.

This story first appeared in the March 21, 2006 issue of WWD. Subscribe Today.

To help these rejuvenated factories cope with a dwindling skilled labor pool, the government lent a hand by passing a Supplementary Labor Scheme to help recruit and train local workers, while allowing the possibility of recruiting help from the mainland when there is a shortage. The plan took effect in March.

“Following the imposition of quota restrictions by the United States and European Union on mainland-made textiles and clothing products, some Hong Kong manufacturers intend to relocate part or all of their operations in the mainland back to Hong Kong or to expand their production here as products made in Hong Kong are not subject to similar quota restrictions,” said a spokesman for the Economic Development & Labor Bureau in January, when the plan was announced.

This is a boon for the industry because while Hong Kong still has a reasonably high unemployment rate — 5.2 percent between December 2005 and February 2006 — locals generally aren’t interested in sewing, linking or working a night shift. In addition, a lot of qualified staff have hit retirement age.

Getting help from China has been done before at Hong Kong factories, but it’s now an easier and faster application process. The plan applies to general and special sewing machine operator, as well as operators for knitting and linking machines.

The program prioritizes hiring local workers: Factories are required to keep staff ratios ranging from 1:1 to 1:4 (local to imported worker) for the garment sector and 1:4 for the knitwear industry.

“The recruitment ratio of local workers to imported labor would ensure that additional local workers could take up employment and help develop the industry,” the EDLB spokesman said. “It will also generate more job opportunities in other supporting and ancillary positions, such as merchandisers, shipping clerks and general laborers.”

The government will review the trial scheme annually, as well as when 5,000 approved mainland workers are in Hong Kong.

Felix Chung, director at Global Apparel Group Ltd., doesn’t use any mainland Chinese labor now at his one Hong Kong facility, but recognizes that getting the extra help in nine weeks as opposed to six to seven months is a plus.

However, he does prefer to have local workers who have been trained as opposed to mainland workers because housing must be provided for the latter.

Chung’s business is split 50-50 between the U.S. and the EU. Armani Exchange, Calvin Klein, Swiss Army and Perry Ellis are among his clients.

The scheme “will give us more flexibility,” said Sun Hing Knitting’s Leung.

He currently recruits about 15 to 20 percent of his staff in Hong Kong from China and will probably maintain that same percentage, he said. His human resources department is looking into the program to see if the firm can take advantage of it, he added.

Sun Hing Knitting is one of many who have boosted investment in existing Hong Kong facilities. In the past 18 months, the company invested about $7 million to expand its Hong Kong facilities and has at least doubled its net capacity, Leung said.

The company’s one factory here employs about 250 people. In Southern China, the company has four factories with about 4,000 people. Sourcing is done in Hangzhou and Macau, and a little bit in Cambodia.

Leung sees the investment as a long-term plan for Hong Kong.

“We still believe that a certain amount of Hong Kong production is a wise decision,” he said, especially since the company attracts the higher end of the market.

Sun Hing Knitting’s exports total about 30 percent to the U.S., 60 percent to Europe and the remaining 10 percent to Asia and the rest of the world.

The key to Hong Kong’s continued success is not only manufacturing goods — it doesn’t approach being competitive with China’s cheaper prices — but also being a value-added manufacturer. This includes offering design and sourcing material for customers, in addition to high-quality niche production and reliable delivery.

Sun Hing Knitting “offers [clients] a total solution,” Leung said, adding that Hong Kong will still have an advantage even as China continues to grow. The company does full knitting production in Hong Kong, while sending shipments to China for minor jobs such as linking.

Global Apparel Group’s Chung said Hong Kong can’t do lower-end garments and must compete with more fashionable brands while offering smaller quantities and shorter lead times. Even if the cost is higher, he contended it’s more stable to have production in Hong Kong.

While trade deals have been arranged between China and the U.S. and EU for the time being, Chung isn’t sure if there will be “more arguments with China, the U.S. and EU,” including antidumping issues.

Another plus for Hong Kong is a supportive government. The foundation here is strong, with a production base and design courses at Hong Kong Polytechnic University, Chung said, adding that the courses might be the best in Asia, although you can’t beat design in Japan.

Chung is also chairman of the Hong Kong Apparel Society, which he says works closely with the government. One example of the industry and government working together is a research center for textile and garments that will open in April. The government put up about $38.5 million and Hong Kong Polytechnic University will oversee it.

The Hong Kong Apparel Society is also helping young designers by forming a Young Fashion Designer Society.

“We can see that this is the right way” to move forward and stay competitive, Chung said, adding that to do business you must have a supportive environment.

But the question remains whether China, known for its speedy learning curve, will be able to overcome Hong Kong even on value-added offerings.

“China is fast, but certain things are a quantum leap,” Leung said. “It’s unlikely China will have a quantum leap in two years.”

Leung said the ability to understand client needs is just one area that shows how far behind China is on certain levels. Leung also doesn’t necessarily see China as a competitor, but as a partner, because Hong Kong plays a teaching role to China for things beyond basic manufacturing.

In the meantime, Hong Kong isn’t waiting on the sidelines to watch how China progresses. In addition to adding value to the supply chain and helping to foster local talent, Hong Kong already is a fashion leader, especially in ready-to-wear, Leung said. Local brands such as Moiselle and Episode have done well in China, he added.

In a Hong Kong Trade Development Council survey taken during fashion week in January this year, about 60 percent of respondents said Hong Kong companies doing casualwear and streetwear have the greatest potential to develop their brands.

The survey also noted that Hong Kong brands offer better designs than other countries and regions when compared with products in the same price category. They are also perceived as being the most appealing in the region, especially for the Chinese mainland.

The survey was compiled from interviews with 400 exhibitors and 736 buyers who attended Hong Kong Fashion Week and World Boutique.

While Hong Kong continues to move up the value chain and stay relevant in an increasingly competitive field, Leung conceded: “That’s the only way we can survive.”

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